Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an email. All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity.com: "

Bonds are still a hedge against stock market losses — this past month notwithstanding.

I’m referring to bonds’ failure to hedge the stock market’s 10% correction from the late-January high to the Feb. 8 low. During that decline, bond prices fell too. Their disappointing performance reinforces a belief that was already quite widespread: Low interest rates reduce, if not eliminate, bonds’ effectiveness as a stock market hedge.

That belief is unjustified, however. What happened over the last month, while rare, is not unprecedented. Since 1926, both the S&P 500 (.SPX) and intermediate-term U.S. Treasurys have fallen in 12.4% of the months — or once every eight months, on average. (See accompanying chart.) Investors are being unrealistic if they expect bonds — or any hedge, for that matter — to work all the time.

Furthermore, there is no historical evidence to suggest that bonds’ record as a hedge is appreciably different when interest rates are as low as they are now. Consider all those months since 1926 in which the yield on the 10-year Treasury was within 0.50 percentage points of where it stands currently. Both the S&P 500 and intermediate-term Treasurys fell in 14.2% of those months, which is not significantly different than the 12.4% frequency across all months.

In fact, bonds’ potential as a stock market hedge has become greater as the 10-year Treasury yield has risen to around the 3% level. Compared to its below-1.5% all-time low from the summer of 2016, the current level gives the Federal Reserve far more room to lower interest rates in order to jump-start the economy in the event of a recession. So even while interest rates’ recent rise has caused bonds to lose value, that rise simultaneously has increased their potential to be an effective hedge against future stock market declines.

This silver lining to interest-rate rises is also evident in the historical record: Situations like what we’ve seen over the past month are almost always temporary. When I focused on calendar years since 1926, instead of months, I found just two — 2.2% of the total — in which both the S&P 500 and intermediate-term Treasurys declined. So if stocks slide for the rest of 2018, chances are quite good that intermediate-term Treasurys will post a gain for the year.

The bottom line? While investors owning a diversified portfolio of stocks and bonds are surely disappointed that both asset classes fell in value this past month, that is no reason to give up on bonds as an effective hedge against future stock market declines. Ironically, in fact, bonds’ recent performance increases the likelihood they’ll be a useful hedge going forward.

Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Long-term-care insurance was supposed to help seniors pay for costly nursing homes and personal aides. Now the industry is imploding. Here's what's at stake for more than 7 million Americans who own the policies.

What Fidelity Offers

Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.

These links are provided by Fidelity Brokerage Services LLC ("FBS") for educational and informational purposes only. FBS is responsible for the information contained in the links. FICS and FBS are separate but affiliated companies and FICS is not involved in the preparation or selection of these links, nor does it explicitly or implicitly endorse or approve information contained in the links.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

Links provided by Fidelity Brokerage Services

These links are provided by Fidelity Brokerage Services LLC ("FBS") for educational and informational purposes only. FBS is responsible for the information contained in the links. FICS and FBS are separate but affiliated companies and FICS is not involved in the preparation or selection of these links, nor does it explicitly or implicitly endorse or approve information contained in the links.

Published by Fidelity Interactive Content Services

Content for this page, unless otherwise indicated with a Fidelity pyramid logo, is published or selected by Fidelity Interactive Content Services LLC ("FICS"), a Fidelity company with main offices in New York, New York. All Web pages that are published by FICS will contain this legend. FICS was established to present users with objective news, information, data and guidance on personal finance topics drawn from a diverse collection of sources including affiliated and non-affiliated financial services publications and FICS-created content. Content selected and published by FICS drawn from affiliated Fidelity companies is labeled as such. FICS selected content is not intended to provide tax, legal, insurance or investment advice and should not be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security by any Fidelity entity or any third-party. Quotes are delayed unless otherwise noted. FICS is owned by FMR LLC and is an affiliate of Fidelity Brokerage Services LLC. Terms of use for Third-Party Content and Research.